La-Z-Boy Incorporated: Fiscal 2022 First-Quarter 10-Q Summary
Business context and reporting period
Unaudited results cover the quarter ended July 24, 2021, compared with July 25, 2020. La-Z-Boy manufactures, distributes and retails upholstered and casegoods furniture through its Wholesale, Retail, Corporate & Other and Joybird operations. The company operated 157 company-owned La-Z-Boy Furniture Galleries stores and maintained a broader network of independent galleries and Comfort Studio locations.
Key financial metrics
| Metric | Q1 FY2022 | Q1 FY2021 | Change |
|---|---|---|---|
| Sales | $524.8 million | $285.5 million | 83.8% increase |
| Gross profit | $202.1 million | $116.4 million | 73.6% increase |
| Gross margin | 38.5% | 40.8% | Down 230 basis points |
| Operating income | $34.4 million | $4.3 million | 694.7% increase |
| Operating margin | 6.5% | 1.5% | Up 500 basis points |
| Net income attributable to La-Z-Boy | $24.6 million | $4.8 million | Increase |
| Diluted EPS | $0.54 | $0.10 | Increase |
| Operating cash flow | $6.2 million | $106.3 million | Decrease |
Retail sales increased 99.5% to $181.8 million, with delivered same-store sales up 92.2% and written same-store sales up 21.9%. Retail operating income was $20.4 million compared with a $6.6 million loss. Wholesale sales increased 76.0% to $393.5 million, while Wholesale operating income increased only 2.2% to $18.3 million, reducing its operating margin to 4.7% from 8.0%. Joybird sales increased to $38.7 million and Corporate & Other’s operating loss narrowed to $4.4 million.
Cash, cash equivalents and restricted cash totaled $336.2 million at July 24, 2021, compared with $394.7 million at April 24, 2021. Total investments were $55.7 million. The company had no borrowings under its revolving credit facility, with $60.7 million of excess availability under the $150.0 million commitment. Lease liabilities totaled $361.8 million, including current and long-term amounts.
Inventory increased to $264.5 million from $226.1 million at fiscal year-end, primarily to support higher demand and production. Cash used in investing activities was $19.5 million, including $19.3 million of capital expenditures. Cash used in financing activities was $44.7 million, including $35.6 million for share repurchases and $6.8 million of dividends.
Material changes versus the prior comparable period
- Results benefited substantially from the prior-year impact of COVID-19, including temporary store and manufacturing closures and phased reopenings.
- Demand remained strong, with record quarterly sales and a record backlog, but production capacity and supply-chain constraints limited fulfillment.
- Gross margin declined because of higher raw-material and freight costs, production expansion costs and labor challenges. Product mix, pricing actions and improved Joybird profitability partially offset these pressures.
- SG&A as a percentage of sales improved materially because of operating leverage and the absence of prior-year business-realignment costs.
- The company continued expanding capacity through additional shifts, manufacturing cells and leased facilities in Mexico.
- The company repurchased 919,041 shares under its authorization during the quarter for $35.6 million. On August 17, 2021, the board authorized an additional 6.5 million shares for repurchase.
Guidance, outlook, risks and unusual items
Management expects fiscal 2022 capital expenditures of approximately $65 million to $75 million. Management stated that available liquidity is adequate for operations, growth plans and capital requirements and expects to continue regular quarterly dividends, although future dividends remain subject to board approval. Management also indicated that it expects to continue share repurchases based on anticipated fiscal 2022 cash generation.
The company expects to pay approximately $10.0 million of Joybird contingent consideration during the second quarter of fiscal 2022 based on achievement of fiscal 2021 performance metrics.
Key risks include COVID-19 developments, changing consumer demand, raw-material availability and pricing, freight costs, labor constraints, manufacturing capacity, global supply-chain disruption and foreign exchange exposure. The filing states that there were no material changes to previously disclosed risk factors, contractual obligations, critical accounting policies or market-risk disclosures.
The filing contains no clear indication of a full-year revenue or earnings forecast. Interim results are not necessarily indicative of full-year performance.
Investor verification points
- Determine whether strong written orders and backlog convert into delivered sales without further material margin deterioration.
- Monitor raw-material, freight and labor costs and the timing and productivity of Mexico capacity expansions.
- Verify cash conversion as inventories and other working-capital requirements remain elevated.
- Assess the sustainability of Retail and Joybird profitability after the favorable comparison with COVID-affected prior-year results.
- Track the $10.0 million Joybird contingent-consideration payment and its effect on liquidity.
- Review the pace of share repurchases, dividends and capital expenditures relative to operating cash flow.
- Follow subsequent Form 4 filings related to former CEO Kurt Darrow’s Rule 10b5-1 plan covering up to 350,000 shares.